Bernanke's Strategy: Painting the Roses Red.

Bernanke's strategy is obvious. It is obvious because he has few choices left. He must paint the roses red, and hope that this will hold off the destructive rage of the Mad Queen.

The Fed will continue to prop up the US financial system while encouraging the economy to muddle through this recession with negative real interest rates.

Inflation doesn't matter to the Fed while they think they can control the public perception of our true financial situation, and especially the consequences.

The Fed feels confident that they know how to fight even a seriously strong inflation so they will let it pass for now. This is a fatal policy error. Volcker was a smart and determined Fed chairman, but he was also lucky.

That means no rate increases until next year at the earliest. The Fed is hoping that nothing unexpected happens to upset their plans. A big bank failure might cause a panic, so Ben and Hank will be working overtime to keep the lid on the problem, and try workouts behind the scenes.

The challenge is to define what a big bank failure really is. Was Bear Stearns a 'big bank failure' or a successful bailout? This is of immediate concern regarding Lehman Brothers which is in an obvious death spiral. Korea DB will not buy them for the 20 percent premium that Dick Fuld demands. So, a hostile takeover by a Fed friendly bank, similar to JPM - Bear, is most likely.

This will give us a look at who the other captive bank of the Fed might be if there is one. If you wish to know what a Captive Bank does besides serving as a wastebasket for other broken banks, read the blog entry just below about the manipulation of the markets.

There may be a role for well-connected predator banks as free lance mercenaries for the Fed's and Treasury's policy decisions. You keep what you kill. This appears to be the ongoing strategy of Hank's alma mater, Goldman Sachs.

A sign that the strategy is at work will be the creation of yet another bubble. Where it will be we cannot know yet. It may be in equities again. Or bonds. The Fed and Treasury are using asset bubbles as instruments of policy to act as a channel of liquidity and to provide the appearance of financial health to an increasingly moribund economy.

Each time the Fed intervenes in the monetary system we get a bubble somewhere, in some 'real world' asset or liability. As we continue forward the interventions and double-talk may become increasingly bold and obviously untrue, especially to outside observers. These are intelligent men, but increasingly desperate and frightened, serving an administration best described as an odd collection of mediocrities and eccentrics. What behaviour they may rationalize together will probably exceed all rational expectations.

The last bubble (or anti-bubble if you prefer) will be an economic depression, and end in a re-issuance of the Dollar, unless the Fed gets very lucky in their friends. By re-issuance we mean that the dollar will be revalued and replaced by something else, whether the amero or a freedom dollar. The precise timing is unknown.

But we have reached the point where at least a de facto default on our debt obligations is the only option. The continuing devaluation of the dollar is running out of steam.

Although there may be a short term liquidity crunch in the unwinding of leverage, the notion that the spectacular dollar debts of 50+ trillions will be paid for with an increasingly valuable dollar through a sustained monetary deflation is a fantasy. No debtor nation that is democratic would choose that course unless it was dominated by foreign powers.

The endgame is default.

The strategy for the rest of the world varies depending on who you are in relation to ground zero for the financial collapse. The most obvious strategy for all will be to limit exposure to the US and its debt deflation.

At the point when the dollar and the debt decouple all hell will break loose, and the system will be tested to its maximum. What replaces the US dollar as the world's reserve currency is more than incidental: it is pivotal. Whomever prints the gold makes the rules.

The empire will be given up in due course. The trick for the bigger players will be to stay out of its way as it happens, and above all to avoid falling into a conflict with the US where the strengths, though diminished, are still formidable.

Ben and Hank are going to try and bluff their way out of this, avoid major failures, and play for time until leverage unwinds and liquidation occurs in an orderly manner, and the economy begins to grow. Some of the other central banks will actively cooperate with the Fed, and some may go down in failure with the US as a result. There will be civil wars and popular revolutions in some countries because of this. Others will merely stand aside and bide their time. The US financial system remains highly precarious.

If you keep this model in mind the next few months and years might make more sense.


Bernanke expects inflation to ‘moderate’
By Krishna Guha in Jackson Hole, Wyoming
August 22 2008 15:14

The decline in the price of oil and the recent strength in the dollar is “encouraging” Ben Bernanke said on Friday at the start of the Federal Reserve’s annual retreat in Jackson Hole Wyoming.

The Federal Reserve chairman said the US central bank had based its strategy of running low interest rates on the assumption that commodity prices would ultimately stabilise, in part due to “slowing global growth.”

Mr Bernanke remarks on oil are the strongest to date and suggest the US central bank – which was initially very wary of reading too much into its decline – is starting to put more weight on the notion that oil may now have stabilised.

But Mr Bernanke said the inflation outlook “remains highly uncertain” not least because of the possibility that oil could rebound.

He said the Fed would “monitor inflation and inflation expectations closely” and would “act as necessary” to secure medium term price stability.

The Fed chief said the “financial storm” that broke a year ago “has not yet subsided” and said its effects on the broader economy were “becoming apparent” in the form of “softening growth and rising unemployment.”

His language suggests that the impact of the credit squeeze on the real economy is still unfolding and it is not likely that the economy will pull out of this soon.

Taken together, his comments underscore that the US central bank has no intention of raising interest rates in the near term, and could stay on hold through the end of the year if growth risks remain high and inflation and inflation expectations ease as expected.

This represents a softening of the Fed’s stance since the May to July period, when policymakers turned hawkish amid growing inflation fears and hopes that the markets and the economy were turning the corner.

However, Mr Bernanke did not suggest that the Fed thinks the inflation problem is over simply because oil has moderated. He said the “jump in inflation” was “in part” the product of a global commodity boom – suggesting other factors could be at work as well.

The Fed continues to retain an underlying orientation towards inflation risk, in large part because policymakers feel they have already addressed growth risks through big pre-emptive rate cuts, but are not protected against any revival in inflation danger.

Policymakers view core inflation (excluding food and energy) and inflation expectations as too high, and will seek to ensure that they decline in the months ahead as the economy weakens.

The Fed chairman told the assembled central bankers from 43 nations that reforms were needed to strengthen the financial system, reduce systemic risk and thereby minimise the “moral hazard” that firms could operate irresponsibly in the belief that they would not be allowed to fail.

He called for a “migration of derivatives trading toward more standardised instruments and the use of well-managed central counterparties.” Mr Bernanke said the Fed was working on ways to strengthen the resilience of the triparty repo market.

Mr Bernanke said Congress should consider giving the US central bank explicit authority to oversee payment systems, while granting Treasury authority to manage a special bankruptcy regime for non-commercial banks.

He said a shift towards a more “macroprudential” approach to regulation – that would consider the systemic implications of market behaviour – was “inevitable and desireable” but said it was necessary to be “realistic” as to how this would work

A Few Large Financial Firms Have Been Manipulating the Price of Commodities

A few large financial firms were able to influence the rules on the exchanges to allow the manipulation of commodities prices, including oil and other energy products.

Enron was an early example of this new found power. The havoc this one company was able to inflict on the State of California is a microcosm of what is happening to the world today.

This report from The Washington Post shows what opened the door for this latest round of market manipulation. Goldman Sachs figures prominently in this story.

The Commodity Futures Modernization Act, along with the repeal of the Glass-Steagall Act, set in motion the events that are battering the financial system today.
How Phil Gramm and the Wall Street Investment Banks Helped to Destroy the US Financial System

The worst is yet to come. The actions of the Fed and the Treasury are only serving to make the final outcome worse. We are heading inexorably towards an abyss.

Until reforms are put back into place, and markets and governance are once again efficient and relatively free of corruption, and price discovery and asset allocation is restored to normal functioning, the economy will lurch from crisis to crisis until we are exhausted and collapse.

The best an individual can do is to try and make themselves, their wealth, their family, and their ongoing welfare as independent as possible from the US financial system. And to vote against every Republican and the old Democratic leadership this fall.

We may be sacrificing a generation of Americans to the altar of greed.

A Few Speculators Dominate the Vast Market for Oil Trading
By David Cho
Washington Post
Thursday, August 21, 2008;

Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.

The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Some lawmakers have blamed these firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.

"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). He added that it was "difficult to comprehend how the CFTC would allow a trader" to acquire such a large oil inventory "and not scrutinize this position any sooner."

The CFTC, which refrains from naming specific traders in its reports, did not publicly identify Vitol.

The agency's report showed only the size of the holdings of an unnamed trader. Vitol's identity as that trader was confirmed by two industry sources with direct knowledge of the matter...

The documents do not say how much Vitol put down to acquire this position, but under NYMEX rules, the down payment could have been as little as $1 billion, with the company borrowing the rest.

The documents do not say how much Vitol put down to acquire this position, but under NYMEX rules, the down payment could have been as little as $1 billion, with the company borrowing the rest.

The biggest players on the commodity exchanges often operate as "swap dealers" who primarily invest on behalf of hedge funds, wealthy individuals and pension funds, allowing these investors to enjoy returns without having to buy an actual contract for oil or other goods. Some dealers also manage commodity trading for commercial firms.

To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC's purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn. (and the metals - Jesse)

Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.

CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets...

The first major change to this regulatory framework occurred in 1991, when Goldman Sachs, through a subsidiary called J. Aron, argued that it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms.

The CFTC granted this request. More exemptions soon followed, including one to the Houston-based energy trader Enron.

"When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes," said Rep. Bart Stupak (D-Mich.) Now, he added, "legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit."

A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the "Enron loophole," saying Enron played a role in crafting it.

In the months after the act was passed, private electronic trading platforms sprang up across the country, challenging the dominance of NYMEX.

"Investment banks had been frustrated with the established exchange because they really were never able to get control of it," said Michael Greenberger, a law professor at the University of Maryland and a former staff member at the CFTC.

The most successful of the private platforms was InterContinental Exchange, or ICE, founded by Goldman Sachs, Morgan Stanley and a few other big brokerages in 2000. ICE soon opened a trading platform in London, allowing its founders to trade vast quantities of U.S. oil overseas without being subject to regulation.

The exemptions for swap dealers and the development of overseas markets allowed big brokerages to open the door for more hedge funds, pensions and big investors to move into commodities.

In the coming years, commodity investments by funds could grow to $1 trillion, veteran hedge fund manager Michael Masters said in testimony before the Senate earlier this year. In an interview, he said this trend could raise commodity prices for everyone in the coming years and "have catastrophic economic effects on millions of already stressed U.S. consumers."

Meanwhile, commodities have been good business for big Wall Street brokerages. Its commodity trades helped keep Goldman Sachs profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann.

"Business is lousy right now," Bowie said about Goldman Sachs. "Commodities and currencies are clearly the strongest business they have right now."

In the coming months, swap dealers expect to have yet another venue for oil speculation. The CFTC has stated it would not stand in the way of trading in U.S. oil contracts overseas in Dubai. Goldman Sachs and Vitol are among the major investors in this new exchange.

Cuomo's Probing Eye Turns To BofA, Deutsche Bank, Goldman Sachs and the Retail Brokers

They will have to wade through a lot of small fry, red herrings, patsies and stooges before they crack one of the big banking houses, if ever. That was the experience in the investigations following the Crash of 1929 and the first years of the Depression. Get your documentation in order gentlemen, and remember, he who cuts the earliest deal makes the best terms.


Cuomo’s probe looks into three banks By Aline van Duyn in New York
August 21 2008 01:59
The Financial Times

Bank of America, Deutsche Bank and Goldman Sachs are being investigated by Andrew Cuomo, the New York attorney-general, as part of his investigation into the selling of auction-rate securities.

Already, Wall Street firms have agreed to buy back nearly $50bn of the securities sold to retail investors, in one of the biggest examples of a bail-out of small investors by large financing groups.

Citigroup, JPMorgan, Merrill Lynch, Morgan Stanley and UBS have agreed to buy back securities at their full face value, even though much of this debt is now trading at a discount.

Most institutional investors are not covered by the agreements.

As well as underwriters of auction-rate debt, which collapsed in February after Wall Street dealers withdrew their support for the debt sales, Mr Cuomo said he was still investigating the role of brokerages that sold the securities, such as Fidelity, Charles Schwab, TD Ameritrade, E*Trade Financial and Oppenheimer.

A spokesman said the investigation’s attention had also turned to Bank of America, Deutsche and Goldman Sachs....

Mr Cuomo’s office replied on Monday in a letter that his investigation “has already begun to uncover some disturbing facts that seem to belie the innocent picture of downstream brokerages you paint”.

“If downstream brokerages deliberately stuck their heads in the sand but continued to actively market these products to unknowing investors, that will certainly be relevant to our calculus of the firms’ culpability,” the letter said...

Bush Remains Adamant and Defiant on Georgia

Hello? The Republic of Georgia launched an unprovoked military assault on South Ossetian civilians under the cover of the opening of the summer Olympic games.

No matter. Bring it on! And we dare you to stop buying our increasingly worthless Treasury and Agency debt.

Is this some kind of Kafka moment? Fool me once, shame on you. Fool me twice, shame on me. Fool me three times and I must be a faithful viewer of Fox News.



Bush: World must stand with Georgia
20 August 2008

ORLANDO, Florida (AFP) — US President George W. Bush said Wednesday that Russia must withdraw its forces from Georgia and that "the world must stand for freedom" in the former Soviet republic.

In a speech to a major US military veterans group, Bush underlined that Georgia had contributed troops to US-led wars in Afghanistan and Iraq "to help others realize the blessings of liberty."

"Georgia stood for freedom around the world. And now the world must stand for freedom in Georgia," he told the Veterans of Foreign Wars (VFW).

Bush hailed Georgia's democratic shift since its 2003 "Rose Revolution" as "one of the most inspiring chapters of history" and warned that the West could not sit idle while fragile reforms came "under siege" by Moscow.

"The world has come together to condemn this assault," he said, noting NATO criticism of Russia and repeated warnings from the West that it cannot do "business as usual" with Moscow in light of the offensive.

NATO "agreed that Russia must honor its commitment to withdraw its troops from Georgia and to return to the status quo before the hostilities began on August the 6th," said Bush.

"The United States of America will continue to support Georgia's democracy. Our military will continue to provide needed humanitarian aid to the Georgian people," said the US president.

"South Ossetia and Abkhazia are part of Georgia. And the United States will work with our allies to ensure Georgia's independence and territorial integrity," he said.