Mish's Global Economic Trend Analysis

Popeye Comments on Events in Japan
Fed Releases 895 PDFs in Response to Court Order; Fed Does Not Disclose Collateral for Loans; Why Secrecy is a Problem; FDIC's Role in the Mess
Geithner's Blatant Lies at the G20 Meeting; Four-Pronged Solution

Posted: 31 Mar 2011 04:14 PM PDT

I just received an email from Popeye regarding the nuclear crisis in Japan. It was a short message: "That's all I can stands and I can't stands no more." Popeye was upset over all the hype.

Yes, there is a catastrophe in Japan. Yes, the reactors are going to be unusable. And yes there is a huge problem regarding radioactive water.

Yet, any rational person could figure all of that out weeks ago.

So with each passing minute, someone, somewhere has to trump up something regarding the nuclear crisis in Japan to absurd levels.

As a prime example, please consider Who Are the Liquidators?

The prime minister of Japan has said that his government is "not in a position where we can be optimistic" about the Fukushima Daiichi Nuclear Power Plant.

Is there any logical conclusion to draw from that statement other than that a large chunk of Japan is going to be uninhabitable?

Blue Ribbon For Hype Award

There is no point in reading an article beyond such absurd hype. There are hundreds of logical possibilities and conclusions one might draw.

The first thing on my mind certainly would not have been that a "huge chunk of Japan was about to become uninhabitable".

I would have thought something along the lines "the Fukushima Daiichi Nuclear Power Plant is totally destroyed". However, I assumed that well over a week ago.

Note that the author did not even phrase his opinion as a "possibility" but rather as an inevitable "logical conclusion".

When you hit a sentence like that, you know the author is in competition for the blue ribbon for hype award. There is no point in reading further because the author has already completely discredited himself.

However, I do point out the site trumping up that "logical conclusion" has an appropriate name This Can't Be Happening.

Presenting hype as a forgone logical conclusion needs to stop.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Fed Releases 895 PDFs in Response to Court Order; Fed Does Not Disclose Collateral for Loans; Why Secrecy is a Problem; FDIC's Role in the Mess

Posted: 31 Mar 2011 10:06 AM PDT

At long last the Fed has responded to court pressure and the freedom of information act to release the names of banks receiving funds during the height of the crisis. The Fed packaged information into 895 individual PDFs and no doubt someone will compile a list soon.

Unfortunately, no one can really say what risks the Fed took because the Fed does not disclose what collateral it accepted for the loans.

Please consider Fed Releases Discount-Window Loan Records Under Order

The Federal Reserve released thousands of pages of secret loan documents under court order, almost three years after Bloomberg LP first requested details of the central bank's unprecedented support to banks during the financial crisis.

The records -- 894 files in PDF form that must be individually opened and read -- reveal for the first time the names of financial institutions that borrowed directly from the central bank through the so-called discount window. The Fed provided the documents after the U.S. Supreme Court this month rejected a banking industry group's attempt to shield them from public view.

"This is an enormous breakthrough in the public interest," said Walker Todd, a former Cleveland Fed attorney who has written research on the Fed lending facility. "They have long wanted to keep the discount window confidential. They have always felt strongly about this. They don't want to tell the public who they are lending to."

The central bank has never revealed identities of borrowers since the discount window began lending in 1914. The Dodd-Frank law exempted the facility last year when it required the Fed to release details of emergency programs that extended $3.3 trillion to financial institutions to stem the credit crisis. While Congress mandated disclosure of discount-window loans made after July 21, 2010 with a two-year delay, the records released today represent the only public source of details on discount- window lending during the crisis.

"It is in the interest of a central bank to put a premium on protecting its reputation, and, in the modern world, that means it should do everything to be as transparent as possible," said Marvin Goodfriend, an economist at Carnegie Mellon University in Pittsburgh who has been researching central bank disclosure since the 1980s.

"I see no reason why a central bank should not be willing to release with a lag most of what it is doing," said Goodfriend, who is a former policy adviser at the Richmond Fed.

The Fed documents released today show the central bank providing credit to borrowers large and small. A page described as "Primary Credit Originations, February 5, 2008" lists the New York branch of Deutsche Bank AG with a loan of $455 million from the New York Fed. On the same day, Macon Bank is listed with a $1,000 loan from the Richmond Fed.

Lending through the discount window soared to a peak of $111 billion on Oct. 29, 2008, as credit markets nearly froze in the wake of the bankruptcy on Sept. 15, 2008, of Lehman Brothers Holdings Inc. While the loans provided banks with backstop cash, the public has never known which banks borrowed or why. Fed officials say all the loans made through the program during the crisis have been repaid with interest.

The Fed was forced to make the disclosures after the U.S. Supreme Court rejected an appeal by the Clearing House Association LLC, a group of the nation's largest commercial banks.

Discount-window lending was not the largest source of the Fed's backstop aid during the crisis. Bernanke also devised programs to loan to U.S. government bond dealers, and to support the short-term debt financing of U.S. corporations.

Also consider Bernanke's Fed Responds to Pressure for More Transparency

For most of its 98-year history, the Federal Reserve has operated with all the transparency and enthusiasm for change of the Vatican. Now the ultra-secretive Fed is starting to change its ways, if somewhat grudgingly. Some of the new openness, such as Chairman Ben S. Bernanke's plan for quarterly press briefings, is the central bank's idea. Much of it comes under duress.

"The free-market system only works if it's fully informed," says Lynn E. Turner, who battled the Fed over disclosure issues while serving as the Securities and Exchange Commission's chief accountant from 1998 to 2001. "There's a lot of similarity between the Fed and an SUV with blacked-out windows."

The Fed says such calls threaten its core function: preserving market confidence by acting as a lender of last resort. Publicizing the names of discount-window borrowers could spark bank runs or discourage sick banks from seeking help until they are fatally compromised. "The full monty may not be a good thing," says Frederic Mishkin, a former Fed governor.

For the Fed, keeping information from investors is nothing new. Congress last year had to pry loose the details of $3.3 trillion worth of crisis-fighting programs that relied on the central bank's vault. In the late 1990s, the Fed successfully resisted the SEC's attempt to require banks to stop using hidden funds, or "cookie jar reserves," to smooth quarterly earnings, says Turner.

Some former Fed insiders say the public should routinely be clued in when private institutions tap the public purse, in the same way the SEC requires companies to inform investors of major financial events. "This should be material information. Investors should have the right to know," says Roberto Perli, a former Fed board economist who is managing director of International Strategy & Investment in Washington.

So what did we find out?

Not much, because the Fed did not disclose collateral.

Notice the misguided policies of the Fed and FDIC though. By preventing all bank runs for decades, the Fed instilled an artificial and undeserved confidence in banks.

It would be far better to disclose banks in trouble, let them go under one at a time quickly, rather than have a gigantic systemic mess at one time.

Secrecy, in conjunction with fractional reserve lending is an exceptionally toxic brew. Overnight trust can change on a dime, system-wide, and it did.

Moreover, by keeping poor banks alive (and my poster-boy for this is Chicago-based Corus Bank for making massive amounts of construction loans to build Florida condos), more money pours into failed institutions further increasing toxic loans.

Failure of FDIC

FDIC is a part of the problem. When the government guarantees deposits, everyone believes in every bank no matter how poorly they are run or what risks those banks poses. No one has any incentive to seek a bank with good lending practices. Instead they seek a bank that pays the highest yield because it is guaranteed.

Driving deposits to banks that take the most risk is no way to run a system. Yet, that is precisely what the FDIC does, up to the FDIC limit of course.

People look at FDIC as a big success because there was no crisis for decades. Instead, we had one gigantic crisis culminate at once, hardly a fair tradeoff for periods of artificially low problems.

FDIC is Fraudulent

No only is FDIC a problem, it is outright fraudulent to guarantee deposits that cannot possibly be guaranteed in a fractional reserve Ponzi-scheme system.

For further discussion of the problems with fractional reserve lending please see Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"

Also see an excellent discussion on the Acting Man blog: Fractional Reserve Banking Revisited

Ending the secrecy is easy. Simply abolish the Fed. However, that not the only thing that needs to happen. For a look at solutions, please consider Geithner's Blatant Lies at the G20 Meeting; Four-Pronged Solution

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Geithner's Blatant Lies at the G20 Meeting; Four-Pronged Solution

Posted: 31 Mar 2011 01:52 AM PDT

Proving that he cannot find his ass with two hands and a road map, Treasury secretary Tim Geithner says inflexible currencies are biggest monetary problem.

Tightly controlled exchange rate regimes are the main flaw in the international monetary system and the solution is simple, U.S. Treasury Secretary Timothy Geithner told a G20 meeting on Thursday.

In a thinly veiled swipe at the Chinese hosts of the seminar of the Group of 20 wealthy and developing economies, Geithner said that countries should have flexible exchange rates and permit free flows of capital to be major players in the global currency order.

Both French President Nicolas Sarkozy and Chinese officials have said it is time to consider bringing the yuan into the basket of currencies that constitutes the SDR, which is currently restricted to the dollar, euro, yen and pound. Geithner suggested that certain conditions should be met first.

"We believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket, and that to achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows," he said.

Emphasizing that solutions to the global monetary system's problems rest at the national level, Geithner said the United States had made progress in fixing the policy mistakes that caused damage in the global financial crisis but still had work to do.

"We are committed to ... fiscal reforms that will reduce deficits as a share of the economy to three percent over the next several years so that we stabilize the ratio of debt to GDP at a level that will not threaten future economic growth," he said.

Lies, Lies, and More Lies

It is hard to know where to start disputing the lies. Clearly the US has shown no interest in fixing the budget deficit. Republican and Democrats are locked in a battle over $30 billion, an amount less than 1% of the budget, and a mere 1.875% of the $1.6 trillion deficit.

For more on the battle, please see Pissing and Moaning Over 1.875% of the Budget

More importantly, does anyone in their right mind think that had China floated the Yuan, we would not have had this global crisis?

Rampant credit expansion, unbridled central bank stimulus, deficit spending, and interest rates held too low too long is what created the crisis.

China still suffers from rampant credit expansion, and unbridled central bank stimulus, and interest rates held too low too long. The US and EU suffer from two of those. In addition, the EU has a myriad of problems stemming from a currency union but no fiscal union.

Japan has a debt to GDP ratio of 200% and growing and Keynesian clowns think the solution for Japan is to go deeper in debt. For that discussion, please see Window for More Idiocy is Always Open

Four-Pronged Problem

Central banks micromanaging interest rates
Factional reserve lending
No enforcement mechanism to solve trade imbalances
Rampant deficit spending in country after country

For a discussion of the problems with fractional reserve lending please see Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"

Also see an excellent discussion on the Acting Man blog: Fractional Reserve Banking Revisited

When Nixon closed the gold window, the enforcement mechanism (settling trade deficits in gold) went out the window with it. That was the last check on fiscal sanity everywhere, and created a license for governments to spend, central banks to print, and trade imbalances to soar.

IMF SDR Non-Solution

Buffoons will be all over Geithner's and Sarkozy's statements predicting the end of the dollar and the beginning of the Yuan as a reserve currency. Forget about it.

Look at the four problems above. Does the IMF wet dream of SDRs (special drawing rights) fix anything? What backs SDRs? What is the enforcement mechanism for curing trade imbalances? Is the Yuan going to be a major reserve currency?

The answers are No, Nothing, None, No.

And "No Timmy Boy", tightly controlled exchange rate regimes are not "the" problem but rather an obscure symptom of the problem.

Giethner said the solution was not complicated. That depends on the meaning of "complicated".

Four-Pronged Solution

Institute a 100% gold-backed dollar
Kill fractional reserve banking
Abolish the Fed (Central banks in general)
Balanced Budget Amendments

Do those things and problems will go away. China will not be able to fix its currency, print like mad, and waste money on enormous property bubbles. Nor will any government be able to print like mad and get away with it.

Blaming the Yuan is like blaming pimples instead of blaming oily skin that causes pimples. China is nothing more than a convenient scapegoat for failed policies of the Fed, the Bush administration, and the Obama administration.

Unfortunately, governments do not want to fix the problems because they all want to print like mad and they all want to do what they want, when they want. Eventually however, the market takes matters into its own hands like it did with Greece.

Bear in mind I do not think it would be possible to implement my Four-Pronged solution big bang, but it certainly could be phased in over a number of years.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Thursday, March 31, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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