Friday, September 27, 2013

Shooting Stars

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Following is a question-and-answer session between Congressman Scott Garrett from New Jersey and Federal Reserve Chairman Ben S. Bernanke before the House Committee on Financial Services, February 27, 2013.

It is puzzling why the Federal Reserve chairman is consistently unprepared to answer questions that fall directly inside the brief he has created for himself. It might be there is no need to understand questions such as those asked by Congressman Garrett, since nobody in the media seems to see through the fraud, either. In any case, this shows again Simple Ben has no idea what he is doing.

The reason for relaying this Q&A is not to explore the measureless depths of Bernanke's ignorance. Instead, the attraction is the final paragraph in which Congressman Garrett speaks. He has an exquisite grasp of how Federal Reserve policy has ruined markets. But, his time was up.

The Chair now recognizes the gentleman from New Jersey, Mr. Garrett, for 5 minutes.

Mr. GARRETT I thank the chairman and I thank Chairman Bernanke. Let me just try to run through in minutes three areas, what you talked about on remittances, what you talked about as far as some of the positive results, and if we have time, some of the effects of the somewhat current loose monetary policy on an international state. So, on remittances, I think you already said that the remittances are here, but they are potentially to go down in the future. If you look at the consolidated balance sheet of the Federal Reserve, we have capital of less than $55 billion, and assets of more than $3 trillion, so that means that all you need is about a 1 quarter of 1 percent increase in the interest rates, and you basically wipe out what you basically have right now, which is a 55 to 1 ratio, and you wipe that out. [Since that date, higher rates have wiped out the Federal Reserve's capital six times over. - FJS] So what is your prediction actually on that going forward with regard to interest rates wiping that ratio out and the effect on remittances to Congress? Can you be more specific on the numbers?

Mr. BERNANKE Certainly. So currently, as I have said, we have in the last 4 years, remitted $290 billion; we currently have more than $200 billion of unrealized capital gains on our balance sheet.  The capital issue is irrelevant. We have additional funding behind the capital. [That is, "we can print more dollars." He has. - FJS] We have $3 trillion of liabilities which are not callable liabilities, like cash, for example.

Mr. GARRETT. I guess I would just ask you if you could follow up on detail on that, because that is not the way I understand it, but I would ask you to put that in writing.

Mr. BERNANKE The main reality here is that if interest rates rise very quickly, then there may be a period where we don't pay any remittances at all to the Treasury. That is the actual outcome. That is important. Under most, and I would say virtually all scenarios, we will be sending remittances to the Treasury substantially higher than the norms established before the crisis.

Mr. GARRETT Since my time is limited, what we are looking at here is around $90 billion in remittances if-you said we could actually see that almost go down to eliminate it. Right now, we are trying to do a sequester at $85 billion. So it sort of puts us in perspective as to what the effect could be as far as your policies there. With regard to the positive indications that you have indicated, you said the stock market and the housing market have gone up because of your monetary policy, but previously you said that the Fed's monetary policy actions earlier this decade, in 2003-2005, did not contribute to the housing bubble in the United States. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you have said in the past, or is it a cause of inflating prices of housing? Can you have it both ways?


Mr. GARRETT. You can?

Mr. BERNANKE. Yeah, we can have it both ways, because they are different phenomena. The mortgage rate, um, uh, is a quantitative thing, so, house prices are going up a reasonable amount, given the strengthening of the housing market, given the strengthening of the economy, given where mortgage rates are. But the amount of movement in mortgage rates, mortgage rates in the early part of this, last decade were around 6 percent. That can't explain why house prices rose as much as they did. Maybe it was a small contribution, but it certainly can't explain the big run-up and then decline.

Mr. GARRETT. But, so now it is. [This was Garrett's dismissal of a man who had no idea what he was saying. - FJS]

So the other area you indicated why we should say your policies are working in a cost-benefit analysis is the stock market. I am sure you are familiar with Milton Friedman's work that says that people only really consume off of their permanent income, which basically means that you don't consume increased consumption because your stocks have gone up in the marketplace. And to that point, I know Mrs. Capito [Congresswoman Shelley Moore Capito, West Virginia, see below for Q&A - FJS] asked the question as to what seniors should do in this situation, and you said, take it out of some fixed assets and put it into the stock market. Heaven forbid that my 90-year-old mother would take her money out of fixed markets and put it in the stock market. I think that is probably the worst advice that is out there. And when you consider that a 1 percent increase in the stock market only has infinitesimal, maybe a 100 percent increase in GDP [sic], I really don't understand: a, how you can give that advice; b, how you can suggest that an increase in the stock market is a positive indicator of your work in a cost-benefit analysis to the rest of the economy.

Mr. BERNANKE. I was, I was not giving financial advice. I apologize if I gave that impression. I was just saying-

Mr. GARRETT. But she was asking you-

Mr. BERNANKE. -that generally-

Mr. GARRETT. She was asking you the question, what should you be doing to benefit the seniors, what should we say to the seniors. And your comments were-

Mr. BERNANKE. What I was saying was that the economy will get stronger because of good policies and that in turn will cause rates to rise in a sustainable way. If we were to raise rates prematurely, we would kill the recovery and rates would come down and we would have a long-term situation with very low rates.

Mr. GARRETT. But wouldn't you have provided for the certainty in the marketplace so you could have more price transparency? Earlier, you said that some risk-taking in the market is appropriate. That was one of your opening comments. Sure, risk-taking is appropriate, but it is appropriate when there is actual price discovery. When you have a market that is distorted, as it is right now by the Fed's monetary policy, you really don't have true price discovery. And so when you do risk-taking now, it is based upon I not really knowing what the appropriate value is of land prices, equity markets prices, so risk-taking now is worse than risk-taking is when the Fed's actions do not distort the marketplace. If you would say-

Chairman HENSARLING. The time of the gentleman has expired.


MRS. CAPITO: Many of us are in that sandwich generation trying to help our parents, and our parents are doing a pretty good job trying to help themselves, but they're relying on their good planning and investments if they have been lucky enough to invest. And the dividend and interest availabilities to them are crushing our seniors as they see their healthcare costs go up. And some of the policies that you put forward I think, and that the Fed has, has caused concern for those of us who are concerned about seniors who don't have the ability to get another job, that's played out for them. What, what can I tell my seniors back home that is going to give them some optimism that they're going to be able to rely on that good planning that they had to carry them through the senior years?

HIM: Well I would say first that savers have many hats. They may own fixed income instruments like bonds, but they may also own stocks or a house or a business. All those other assets benefit when the economy strengthens and those values have gone up. The stock market is roughly doubled as you know in the past few years.

This was quite specific advice to Mrs. Capito. Besides crawling into Lucifer's den before answering Congressman Garrett, why is this nincompoop telling old people to buy stocks AFTER the stock market has doubled? We might give him the benefit of the doubt that, since Bernanke has banished "actual price discovery" in all markets, and thinks he can do so forever, he will double Mrs. Capito's money over the next few years.

Of course Chairman Bernanke is not the only lifetime bureaucrat to offer carpe diem financial advice.

Following is the good word of David Stockman, author of the masterpiece,  The Great Deformation: The Corruption of Capitalism in America . He was interviewed by Market Watch on April 3, 2013. Eric Rosengren is the President of the Boston Fed.

DAVID STOCKMAN: If you have your money in a 401(k) but you get it out of the stock market or ETFs or bond funds that have duration exposure, and you stay very liquid even if you're making almost no return, thanks to Ben Bernanke, who's crucifying the savers of America on a cross of ZIRP, at least you're safe. In the world ahead, there is such a huge collapse coming in the financial markets, the third one since 2000, it's better to preserve your capital, stay liquid, keep your head down, don't borrow money unless you absolutely have to. That is very discouraging because people would like to earn a return on their savings.

When we have this character Rosengren up in Boston saying, it's a good thing, we are trying to induce people to go into risk assets. Who in the hell is Rosengren to tell old ladies of America they have to buy junk bonds because the Fed tells them to!!!!! If the old ladies feel safer in a CD, they ought to be able to earn something besides dog food money on it. There is going to be a revolt against these arrogant mandarins running the Fed, they will rue the day they arrogated to themselves such massive power. [Italics are my irrational exuberance - FJS]

Knitting. Still Knitting.


Saturday, September 21, 2013

Once Again, Do Not Pay Attention to that Man behind the Curtain

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            It should be obvious by now that mass democratization over the past century demanded a steady flow of inflation. The inflation of self-esteem: This inspired rights and privileges. These were abetted by a spectacular rise in quantity (inflation) of money and equally sensational erosion of quality of everything: goods, services, education, speech, writing, words, phrases.

            This brings us to the rise of the professorate, over the past century, an obvious failure in quality defeated by hordes of pretenders. The professorate, unsure of its social status, especially in such empty fields as economics, infested the institutional bureaucracies with the twin accomplishments of maiming standards of merit and asserting (their own) accomplishment of reform and democratization. It was they who designed the blueprint for mass bureaucracy (which has smothered initiative, thus resistance, in the mass democracy), and defined official "policy." Today, policy is the assertion of the hour to stay one step ahead of the great, failed experiment of mass democratization for which the faux academics must be held accountable.

We come to the non-decision of Federal Reserve Chairman Ben S. Bernanke on September 18, 2013. Far too much, or not enough, thought is spent anticipating this man's intentions. His non-decision on September 18 was to not "taper" his Money-for-Nothing Policy that central banking bureaucrats have labeled "quantitative easing." An example of "tapering": if he had authorized his clerk to type "135" instead of "145" billion of dollars onto a keypad: that is the U.S. central-banking bureaucrats' elevation of circulating dollars each and every month. (The example may seem unnecessary to some, but Reuters or Marketwatch released a poll on September 18 about the ignorance of Americans. Seventy-three-percent do not know what "quantitative easing" means. It was one of those "ha-ha-ha" see-how-stupid-the-people-are stories. Yet the woman who replied "he does stocks and all that," had a perfect grasp of what Bernanke is up to, if not at the New York Fed, through the Hong Kong Monetary Authority, Chicago, and the two dozen other central banks that are now buying common stock.)

            Brokerage houses and the media offered different reasons for the Chairman's declaration ("the economy is weaker than he thought" and so on), but this all beside the point.

            Bureaucracies inflate. The rise of the bureaucracy goes hand-in-hand with the massing of the people. A bureaucracy will never make a decision that contracts its inflationary determination. This is as true for the Federal Reserve or the Bureau of Labor Statistics (where a "job" is defined as working one hour a week.)

            This is a matter of prestige, power, and cowardice. Never saying "no" permits bureaucracies from taking responsibility for action. They are generally successful at diverting blame for their policies. The recent fifth anniversary of "I remember when Lehman failed" stories did not touch the Federal Reserve or the various housing authorities; yet, they are the central reason for the credit and mortgage collapse.

            Keeping the inevitable inflationary tendency of bureaucratic policy in mind, it is no surprise the academics never thought of how they would reverse quantitative easing. Bureaucrats do not think like that. They whip up grand solutions to illusionary or misstated problems but leave the conclusion to fate. Think of all the grand schemes in housing, health-care coverage, race relations, urban redevelopment - never a conclusion, never an academic bureaucrat held accountable.

            From the moment Ben Bernanke was introduced in Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, through this current diatribe, it has been stated and emphasized there would never be an end to money-for-nothing, the last hope after a century of academic and bureaucratic meddling. Bernanke or the court jester who succeeds him will expand paper (electronic pulses, if we must) currency until the collapse.

            This is the simple and direct reason that, all talk to the contrary, gold, silver, proficiency at carpentry or farming are worth one's attention.

            Although the media will run around with its head cut off looking for culprits and explanations, let us not lose sight of the current kingpin who is central to the awful battle ahead of us: Ben S. Bernanke.

Saturday, September 14, 2013

Why Academic, Money-Printing, Central Bankers Will Not Change Course

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            The Federal Reserve may sell a bond or two in the coming months, but Ben or Jan or Big Lar can be trusted to inflate. The professors know no other course:

Johann Peter Eckermann's conversation with Goethe, February 1, 1827:

"We talked about the professors who, after they had found a better theory, still [ignored it: a very loose consolidation - FJS] 'This is not to be wondered at,' said Goethe; 'such people continue in error because they are indebted to it for their existence. They would have to learn everything over again, and that would be very inconvenient.' 'But, said I, 'how can their experiments prove the truth when the basis for their evaluation is false?' 'They do not prove the truth,' said Goethe, 'nor is such the intention; the only point with these professors is to prove their own opinion. On this account, they conceal all experiments that would reveal the truth and show their doctrine untenable. Then the scholars - what do they care for truth? They, like the rest, are perfectly satisfied if they can prate away empirically; that is the whole matter.'"

- Conversations of Goethe with Eckermann

Friday, September 6, 2013


Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Between October 1998 and November 1999, the Nasdaq composite rose 150%. Everyone who was invested believed in Alan Greenspan and the Federal Reserve. At a Grant's Interest Rate Observer conference in November 1999, Michael Steinhardt, one of the best traders over the previous three decades, did not buy it.

He did not think the Fed's leadership would be worth much when it was needed most. He spoke about Wall Street's abandonment of controls, leadership and responsibility: "The liquidity safeguards, historically, were the specialists' books, the retail system, and the institutional liquidity providers in the major brokerage firms. They were the mechanisms that the stock exchange itself had provided, and they were all structured for a system where trading was a very, very small fraction of what we're seeing today. Now there are no specialists' books; there is no serious liquidity provided by brokerage firms; and the trading mechanisms of the exchange are hardly relevant to the sorts of volumes that exist today. So yes, the Federal Reserve, if you define that broad context of liquidity in a financial sense, does still exist, but in a securities market sense, none of the former ones do."

That was 14 years ago. In this age of uplift and improvement, does the current Federal Reserve Board understand the consequences (as seen in April 2000 and in 2007 and 2008) of the lost "liquidity safeguards...."?

This can only be answered in the future, 500 years from now - it will take that long for the human mind to believe this Arsenal of Annihilation was given responsibility above latrine duty. From all sources though, the top of the Fed has grown more withdrawn, abstract, and divorced from reality since the millennium. The king pins are not interested in the functioning of markets. Markets exist to fulfill economic policy of our policy-makers. It is unfathomable to the anointed that government control of markets would even be questioned.


James Grant, addressing Governor Jeremy C. Stein, Federal Reserve Board: "Good morning, Governor. James Grant of Grant's Interest Rate Observer. Could you help us understand the economic difference - not the legal one, but the economic distinction - between the private manipulation of Libor, on the one hand, and the public manipulation of markets, on the other, doing business as ZIRP, QE, Twist, the "portfolio balance channel"? What ever did happen to the price mechanism?"

Governor Jeremy C. Stein, Federal Reserve Board: "You know, that's a hard question for me to answer, because [laughter] I don't see the connection between these two whatsoever. I mean, obviously, the Libor set - it is a set of criminal and near-criminal activity, which is a very substantial policy concern. A lot of effort is going into trying to, you know, both reform Libor itself, look at other benchmarks, see if they're more resilient. That's a whole set of issues. To be frank, I just don't see the connection to that and the monetary policy issue."

            This is the type of thinking that gives investors confidence (apparently) that the Fed will not permit the stock market to fall 20%. Yet, the man has no interest in how people participate (or don't) in markets.

            Over these same 14 years, technology has turned public-market investing into a much more dangerous arena. Some will say the withdrawal of private money from markets shows the public understands this, since there is very little trading left, except by institutions and their algorithms.

            The curious investigator, 500 years from now, will study our worship of technology despite daily evidence of its failure. Here, we discuss the malfunctioning of public markets. The Nasdaq took a mid-week siesta on August 22, 2013, and there are no answers. (An hour before the Nasdaq died, NYSE Euronext announced a breakdown of its Arca exchange, for symbols from TACT through Z. Two days before, Goldman Sachs pushed a wrong button and stock-options with ticker symbols between H through L fell to $1.00. After the Nasdaq ran through the usual excuses - "software bug" "connectivity issue" "latent flaw" "system overload" - the exchange magnanimously announced it crashed "to protect the integrity of the market.") With technology, any excuse for obvious failure is taken as gospel.

            None of this nonsense would exist if "liquidity safeguards, historically...the specialists' books, the retail system, and the institutional liquidity providers in the major brokerage firms" - that is, people, were still on the chopping block.

            Turning exchanges back into public utilities is sine qua non.

            OF ALL THE COMMENTARY REGARDING THE NEXT FED CHAIRMAN, NONE WAS MORE FETCHING than that offered by star Financial Times columnist Gillian Tett. Under the headline "Central bank's chief needs to master the art of storytelling," she wrote: "The next Fed chair also needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals, without us even noticing. Somebody, in other words, who can cast spells with both their spreadsheets and words. In short, what is needed is nothing less than a monetary shaman."

            A test of such talent will be the day stock markets shut - and never reopen - claiming they are protecting the integrity of the market. Very few will protest.

            In fact, the new Fed head may have more leeway to "shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals." So we learned under the headline: "U.S. Repeals Propaganda Ban, Spreads Government Made News to Americans.", July 14, 2013 [Note: Bastille Day].


Reporter John Hudson: "For decades, a so-called anti-propaganda law prevented the U.S. government's mammoth broadcasting arm from delivering programming to American audiences. But on July 2, that came silently to an end with the implementation of a new reform passed in January. The result: an unleashing of thousands of hours per week of government-funded radio and TV programs for domestic U.S. consumption in a reform initially criticized as a green light for U.S. domestic propaganda efforts. So what just happened?"


            That's as far as I got. The propaganda machine seems to be working at full tilt already.


            This was announced on the heels (July 12, 2013) of a Washington Post article by Josh Hicks after the Department of Homeland Security had "warned its employees that the government may penalize them for opening a Washington Post article containing a classified slide that shows how the National Security Agency eavesdrops on international communications.... An internal memo from DHS headquarters told workers on Friday that viewing the document from an 'unclassified government workstation' could lead to administrative or legal action. 'You may be violating your non-disclosure agreement in which you sign that you will protect classified national security information,' the communication said. The memo said workers who view the article through an unclassified workstation should report the incident as a 'classified data spillage.'" Hicks provided a link to the double-secret Washington Post article.

OF COURSE, FINANCE IS ONLY A SUBSET OF THE GENERAL DELERIUM. IT WAS QUITE A LEAP for Secretary of State John Kerry to sit before Congress and extort the imagery of Americans dying during the Normandy invasion ("You ask the question, 'Why does the United States have to be out there?' You ever been to the cemetery in France? Ya know, above those beaches? Why'd those guys have to go do that?") as reason to invade Syria. The congressmen did not seem to notice. Maybe they felt sorry for him.. He was stumbling all over the lot trying to make sense.