The Fed Drops Rates To Help SPECULATORS, Not Housing, Analyst Relates
Friday, 23. May 2008, 01:12:24
Elaine Meinel Supkis writing in The Fed Drops Rates To Help SPECULATORS, Not Housing documents that massive monies have floded into commodities from the banks and investment bankers; she relates:
"There is a lot of loans out there right now because they are being used by speculators...in commodity markets! The cheaper the loans, the more they make commodities climb. THIS IS CAUSING INFLATION.
Long ago, I said all the yapping about the housing crisis was NOT the cause of the banking collapse. It was a symptom. The real cause is in the graph above: housing is crashing due to the banks ceasing the flow of money towards housing for the simple reason, the 350+ basis point advantage is GONE. They make NO PROFITS. But they do make profits if this money flows to...the speculators. They have an endless appetite for cheap loans! Considering the risks they are taking, a loan for less than 11% is cheap as hell.
If oil rises by 165% in six months, my god! The profits! Paying 10% on a loan from a bank to play that market: what a spread! This is why the hedge funds that finally dumped their toxic paper off at the Fed for a fist full of Treasuries ran off to the oil markets and plunked it all down on bids! As well as rice, wheat and a host of other things. No one is putting on housing. Housing is dead as a doornail since it is declining.
And the flood of Funny Money™ pouring into commodities is rapidly destroying our nation's economy, nay, the entire planet's international and internal commerce and trade!
A prediction: if oil hits $200 a barrel as the US threatens Chavez and Iran as well as Russia [with those stupid missiles in Poland!] this will be due to the speculators knowing this threatens the future of oil shipping so they bid up the price. And at $200 a barrel, our economy will collapse. Millions of Americans will have to go without heating, travel to work, food will be too expensive, our nation will collapse. And if the Fed feeds these speculators more cheap loans, it will get WORSE. Cheap Fed loans=>speculators using it to bid up oil=>total social and economic collapse of the US. I would think someone would put all this together and react.
They have to stop the merry go round of easy lending to the big speculative banking houses, the founders and owners of the Fed itself. JP Morgan and Goldman Sachs. We have to clip their wings before they fly off with all the wealth in the world."
Secretary Paulson Speaks In CNN Interview
Natalie Erlich, of CNBC.com in article Paulson on Oil: Don't Blame Speculators relates that U.S. Treasury Secretary Henry Paulson told CNBC Thursday that rising oil prices are not driven by market speculation but instead reflect tight supplies and growing global demand. (Richard: Elaine's reseach documents othewise).
"There aren't easy short-term solutions," he said. "But it's about increasing the supply over the longer term and developing new sources of energy." (Richard: It should be about cutting dependency on oil, and providing incentives to use solar and to conserve use of energy of all types).
However, the Treasury secretary emphasized that the long-term economic fundamentals are strong, and the United States remains competitive globally. (Richard: The fundamentals are weak, and the US cannot be competitive globally because most all of our factories were transferred out of the country; and further efforts to be competitive will only pauperize the people, that is the workers, in manufacturing).
"We've got some significant problems today, in the short-term, but I don't go to any country that there are not many more problems than we have in the U.S.," he said. "So as I look at it, the U.S. workers compare very favorably everywhere else in terms of productivity." (For the entire CNBC interview with Paulson, click on interview.) (Richard: The problems are severe and cannot be resolved in the short term, medium term or any term; these have come through trade deficits, free trade agreements, transferring of factories overseas, dishonoring amd non enforcement of laws regarding union bargaining, and the repeal of the Glass Steagall act; the result is that both a financial emergency, and a second Great Depression are on the way, and cannot be stopped).
However, Paulson cited a need to bolster training and education of the U.S. workforce. (Richard: Mr. Paulson please be specific and provide some details of how to achieve these goals).
He also insisted that the United States has a strong dollar policy. (Richard: I see no evidence of that; in fact I see just the opposite, as TAF, TSLF, and PDCF, only serve to debase the US currency, and lever up the price of gold which trades inversely of the US Dollar).
"The long-term strength [of the U.S. economy] is going to be reflected in the value of our currency," he said. "Our policy has got to be a policy that's going to increase confidence in the U.S. economy. Right now we're in a tough patch." (Richard: The best way to achieve these goals would have been to raise interest rates in 2007 and 2008; and let the banks go into bankruptcy for all their financialization of home mortgages which created highly leveraged CDOs, which today is based on irredeemable debt that is destabilizing the US and European stock markets, and that will have to simply be liquidated that is done away with by writing it off).
While turmoil in the credit markets has calmed since March, Paulson said, the biggest risk to the economy remains housing. (Richard: Yes falling home prices is the biggest risk and nothing can be done to stop it).
He also praised Congress' recent efforts to create an independent regulator for Fannie Mae and Freddie Mac, which control some 80 percent of U.S. mortgage origination, he said. (Richard: OFHEO is and will likely be "the regulator"; any other regulation is even more untrustworthy, and would only be a mirage solution).
"A strong regulator will really add to the confidence surrounding these organizations and the secondary mortgage market," he said. "That ultimately means lower rates and more access to mortgage financing, which I think is going to be helpful in shortening the correction in the housing market." (Richard: The regulatory format Mr. Paulson envsions would only add confidence to Mr Paulson and those of his kind, the housing market is not in a correction, it is headed into liquidation and depression).
Commentary by Richard
Elaine's research is timely and helpful: Mr. Paulson's communication is all Orwellian Newspeak, where words are twisted and are the exact opposite of reality.
F. William Engdahl writing in GlobalResearch.ca article More On The Real Reason Behind High Oil Prices documents that at least 60% of today’s $130 per barrel price of crude oil comes from unregulated futures speculation by hedge funds.
Andrew of My Three Cents presents this perspective on the mechanics of speculation in his May 15, 2008 article, How Banks and The Fed are Hiding the Credit Crisis:
From Freddie Mac's recent earnings conference: Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?
Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three.
Bloomberg aricle by Dawn Kopecki: Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren’t traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December.
So what happened and why does this matter?
First of all, they found that an additional $125B of loans were of questionable value. In just 3 months. Secondly, they reclassified them to avoid presenting a market value.
Given that home prices have fallen at least 10% (more actually), Freddie Mac would have had to write down an additional $12.5B (10% * $125B)
That would lead to 2 follow-on problems
1. A much bigger loss
2. A need to firm up their capital ratio
Like Enron, they are deliberately hiding the scale of financial distress. Unlike Enron, they are using legal accounting tricks to do it. And they are doing it in public - meaning that the Fed is very aware of this and complicit. The key here isn't the desire to avoid a major loss. The key is that the Fed would have to move against any bank that has proven to be insolvent (meaning capital ratios can not be maintained).
I figure that every major investor in these assets is doing the same thing: shifting bad assets to Level 3 in order to hide the scale of financial distress. This is how the Fed has managed to solve the credit mess - by sweeping it under the rug. Eventually the loss will come out, but by then the assumption is that the lenders will have better liquidity.
Amazing. Because one expects the Fed to maintain the credibility of the financial system. As they say, rules are made to be broken.
Now we have the final piece of the puzzle.
* The Fed saves banks and investment companies from having to fix capital requirements. The original plan was to use the toxic loans as collateral. But the Fed doesn't have enough money to loan. Instead, the companies disguise the toxic loans as Level three assets. The accountants are shut up.
* Return to business as usual - lending, investing and speculation. The Fed lowers the cost of borrowing to below inflation. Better still, for the first time, they lend to investment companies.
* Markets take off. Invetsment companies promptly speculate and drive commodities up 25%
I don't think this will unwind anytime soon. Clearly the Fed is not happy that helping investment companies to recover has come at the cost of rising food and oil inflation. But as usual, they can't resist blowing asset bubbles.
I think the Fed will talk a big game but will not actually do anything that will reduce the speculation.
So we have a conflict set up in the market. On the one hand, stock prices are clearly over valued based on fundamentals. Companies with single digit EPS growth are enjoying PEs reflecting 25% growth.
On the other hand, we have the Fed money flow boosting stock prices.
Eventually, fundamentals will win out. The timing is unclear, because the Fed has shown an amazingly strong desire to help the financial houses out of their over-leveraged position.
It certainly makes me re-think my shorts because my premise was that Wall Street would have to face th emusic. Apparently they don't.
"There is a lot of loans out there right now because they are being used by speculators...in commodity markets! The cheaper the loans, the more they make commodities climb. THIS IS CAUSING INFLATION.
Long ago, I said all the yapping about the housing crisis was NOT the cause of the banking collapse. It was a symptom. The real cause is in the graph above: housing is crashing due to the banks ceasing the flow of money towards housing for the simple reason, the 350+ basis point advantage is GONE. They make NO PROFITS. But they do make profits if this money flows to...the speculators. They have an endless appetite for cheap loans! Considering the risks they are taking, a loan for less than 11% is cheap as hell.
If oil rises by 165% in six months, my god! The profits! Paying 10% on a loan from a bank to play that market: what a spread! This is why the hedge funds that finally dumped their toxic paper off at the Fed for a fist full of Treasuries ran off to the oil markets and plunked it all down on bids! As well as rice, wheat and a host of other things. No one is putting on housing. Housing is dead as a doornail since it is declining.
And the flood of Funny Money™ pouring into commodities is rapidly destroying our nation's economy, nay, the entire planet's international and internal commerce and trade!
A prediction: if oil hits $200 a barrel as the US threatens Chavez and Iran as well as Russia [with those stupid missiles in Poland!] this will be due to the speculators knowing this threatens the future of oil shipping so they bid up the price. And at $200 a barrel, our economy will collapse. Millions of Americans will have to go without heating, travel to work, food will be too expensive, our nation will collapse. And if the Fed feeds these speculators more cheap loans, it will get WORSE. Cheap Fed loans=>speculators using it to bid up oil=>total social and economic collapse of the US. I would think someone would put all this together and react.
They have to stop the merry go round of easy lending to the big speculative banking houses, the founders and owners of the Fed itself. JP Morgan and Goldman Sachs. We have to clip their wings before they fly off with all the wealth in the world."
Secretary Paulson Speaks In CNN Interview
Natalie Erlich, of CNBC.com in article Paulson on Oil: Don't Blame Speculators relates that U.S. Treasury Secretary Henry Paulson told CNBC Thursday that rising oil prices are not driven by market speculation but instead reflect tight supplies and growing global demand. (Richard: Elaine's reseach documents othewise).
"There aren't easy short-term solutions," he said. "But it's about increasing the supply over the longer term and developing new sources of energy." (Richard: It should be about cutting dependency on oil, and providing incentives to use solar and to conserve use of energy of all types).
However, the Treasury secretary emphasized that the long-term economic fundamentals are strong, and the United States remains competitive globally. (Richard: The fundamentals are weak, and the US cannot be competitive globally because most all of our factories were transferred out of the country; and further efforts to be competitive will only pauperize the people, that is the workers, in manufacturing).
"We've got some significant problems today, in the short-term, but I don't go to any country that there are not many more problems than we have in the U.S.," he said. "So as I look at it, the U.S. workers compare very favorably everywhere else in terms of productivity." (For the entire CNBC interview with Paulson, click on interview.) (Richard: The problems are severe and cannot be resolved in the short term, medium term or any term; these have come through trade deficits, free trade agreements, transferring of factories overseas, dishonoring amd non enforcement of laws regarding union bargaining, and the repeal of the Glass Steagall act; the result is that both a financial emergency, and a second Great Depression are on the way, and cannot be stopped).
However, Paulson cited a need to bolster training and education of the U.S. workforce. (Richard: Mr. Paulson please be specific and provide some details of how to achieve these goals).
He also insisted that the United States has a strong dollar policy. (Richard: I see no evidence of that; in fact I see just the opposite, as TAF, TSLF, and PDCF, only serve to debase the US currency, and lever up the price of gold which trades inversely of the US Dollar).
"The long-term strength [of the U.S. economy] is going to be reflected in the value of our currency," he said. "Our policy has got to be a policy that's going to increase confidence in the U.S. economy. Right now we're in a tough patch." (Richard: The best way to achieve these goals would have been to raise interest rates in 2007 and 2008; and let the banks go into bankruptcy for all their financialization of home mortgages which created highly leveraged CDOs, which today is based on irredeemable debt that is destabilizing the US and European stock markets, and that will have to simply be liquidated that is done away with by writing it off).
While turmoil in the credit markets has calmed since March, Paulson said, the biggest risk to the economy remains housing. (Richard: Yes falling home prices is the biggest risk and nothing can be done to stop it).
He also praised Congress' recent efforts to create an independent regulator for Fannie Mae and Freddie Mac, which control some 80 percent of U.S. mortgage origination, he said. (Richard: OFHEO is and will likely be "the regulator"; any other regulation is even more untrustworthy, and would only be a mirage solution).
"A strong regulator will really add to the confidence surrounding these organizations and the secondary mortgage market," he said. "That ultimately means lower rates and more access to mortgage financing, which I think is going to be helpful in shortening the correction in the housing market." (Richard: The regulatory format Mr. Paulson envsions would only add confidence to Mr Paulson and those of his kind, the housing market is not in a correction, it is headed into liquidation and depression).
Commentary by Richard
Elaine's research is timely and helpful: Mr. Paulson's communication is all Orwellian Newspeak, where words are twisted and are the exact opposite of reality.
F. William Engdahl writing in GlobalResearch.ca article More On The Real Reason Behind High Oil Prices documents that at least 60% of today’s $130 per barrel price of crude oil comes from unregulated futures speculation by hedge funds.
Andrew of My Three Cents presents this perspective on the mechanics of speculation in his May 15, 2008 article, How Banks and The Fed are Hiding the Credit Crisis:
From Freddie Mac's recent earnings conference: Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?
Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three.
Bloomberg aricle by Dawn Kopecki: Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren’t traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December.
So what happened and why does this matter?
First of all, they found that an additional $125B of loans were of questionable value. In just 3 months. Secondly, they reclassified them to avoid presenting a market value.
Given that home prices have fallen at least 10% (more actually), Freddie Mac would have had to write down an additional $12.5B (10% * $125B)
That would lead to 2 follow-on problems
1. A much bigger loss
2. A need to firm up their capital ratio
Like Enron, they are deliberately hiding the scale of financial distress. Unlike Enron, they are using legal accounting tricks to do it. And they are doing it in public - meaning that the Fed is very aware of this and complicit. The key here isn't the desire to avoid a major loss. The key is that the Fed would have to move against any bank that has proven to be insolvent (meaning capital ratios can not be maintained).
I figure that every major investor in these assets is doing the same thing: shifting bad assets to Level 3 in order to hide the scale of financial distress. This is how the Fed has managed to solve the credit mess - by sweeping it under the rug. Eventually the loss will come out, but by then the assumption is that the lenders will have better liquidity.
Amazing. Because one expects the Fed to maintain the credibility of the financial system. As they say, rules are made to be broken.
Now we have the final piece of the puzzle.
* The Fed saves banks and investment companies from having to fix capital requirements. The original plan was to use the toxic loans as collateral. But the Fed doesn't have enough money to loan. Instead, the companies disguise the toxic loans as Level three assets. The accountants are shut up.
* Return to business as usual - lending, investing and speculation. The Fed lowers the cost of borrowing to below inflation. Better still, for the first time, they lend to investment companies.
* Markets take off. Invetsment companies promptly speculate and drive commodities up 25%
I don't think this will unwind anytime soon. Clearly the Fed is not happy that helping investment companies to recover has come at the cost of rising food and oil inflation. But as usual, they can't resist blowing asset bubbles.
I think the Fed will talk a big game but will not actually do anything that will reduce the speculation.
So we have a conflict set up in the market. On the one hand, stock prices are clearly over valued based on fundamentals. Companies with single digit EPS growth are enjoying PEs reflecting 25% growth.
On the other hand, we have the Fed money flow boosting stock prices.
Eventually, fundamentals will win out. The timing is unclear, because the Fed has shown an amazingly strong desire to help the financial houses out of their over-leveraged position.
It certainly makes me re-think my shorts because my premise was that Wall Street would have to face th emusic. Apparently they don't.
WIDGETIZE