"Give me control over a nation's
currency and I care not who makes its laws." --Baron M.A. Rothschild
Wall Street loves cheap money. That's why
traders were celebrating last Tuesday when Fed chief Ben Bernanke announced
that he'd drop interest rates from 5.25 percent to 4.75 percent. The stock
market immediately zoomed skyward adding 336 points before the bell rang. The
next day the giddiness continued. By mid-morning the Dow was up another 110
points and headed for the stratosphere. Everyone on Wall Street loves Bernanke.
He brings them candy and sweets and lets the American worker pay the bill.
So far, the
scholarly-looking Bernanke has shown that he is no different than his
predecessor, Alan Greenspan. Facing his first crisis, the new Fed chief chose
to reward his fat-cat friends at the hedge funds and investment banks by
savaging the dollar. As soon as he announced his plan to cut the Fed funds rate
by .50 basis points, gold soared to $736 per ounce, oil shot up to $82 per
barrel, and the euro climbed to a new high of $1.40. These are all the
predictable signs of inflation. Food and energy prices will surely follow. The
bottom line is that the investor class has been bailed out at the expense of
everyone else who trades in dollars.
Bernanke invoked the "Greenspan put," which means
that he used his power to protect his friends from the losses they should have
incurred from their bad bets. Now, the big market players know that he can be
counted on to bail them out whenever they make poor investment decisions. He's
also lived up to his nickname, "Helicopter Ben"; ready to deal with
every new calamity by tossing trillions of freshly-minted US greenbacks into the
jet-stream over the NYSE so elated traders can jack up their PEs and fatten
their bottom lines. We think Bernanke should abandon the helicopter altogether
and personally deliver pallet-loads of $100 bills to Wall Street's doorstep,
just like Bush does with contractors in Iraq. That way the fund managers can
keep stoking the market with cheap cash without dawdling at the Fed's Discount
Despite the merriment on Wall Street, there is a downside to
Bernanke's actions. The Fed chief has shown foreign investors that he WILL NOT
DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by
investing in the US. It alerts them to the fact that the "strong
dollar" policy is a fraud and that they're better off getting out of US
Treasuries and dollar-backed assets. Apparently, many have already gotten the
message. Last month, foreign central banks and investors dumped $9.4 billion of
US Treasuries and bonds compared to net purchases in June of $24.7 billion.
That means that foreigners have stopped buying our debt, which is currently
$800 billion per year. That's the last leg holding up the wobbly greenback. The
dollar will undoubtedly fall precipitously.
So, why would
Bernanke weaken the dollar even more by lowering rates 50 basis points?
Is he crazy or did
We don't know, but
we do know that this is the beginning of capital flight -- the sudden exodus of
foreign investment from US debt and equities. Most likely, it will be
accompanied by the hissssing sound of gas escaping from a punctured equity
bubble followed quickly by a painful round of deflation, massive unemployment
and the gnashing of teeth.
The size of the
current account deficit, which peaked in 2005 at 6.8 percent of GDP, has
dropped to 5.5 percent by the end of the second quarter of 2007. This is an
indication that the maxed-out American consumer is running out of gas and that
our foreign trading partners are slowing their intake of US dollars. Now comes
the painful part. As the trade deficit shrinks, foreign investment will become
scarcer and the dollar will tumble. That means interest rates will have to go
up and American's will face an agonizing economic downturn.
This is all part of the Federal Reserve's master plan for
reorganizing the US economy and political system. Since Bush took office in
2000, the dollar has been deliberately weakened; losing more than 40 percent of
its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per
euro in 2007) It has fared even worse against gold. The Fed "rubber stamped"
Bush's $400 billion per year tax breaks for the wealthy and looked on
approvingly while $4 trillion of national wealth was transferred to foreign
investors and banks via the current account deficit (the result of currency
Also, we now know that Alan Greenspan supported the plan to
invade Iraq. He even shamelessly admitted that the war was really about oil,
which suggests that he was attempting to preserve the dollar's link to
petroleum. That linkage is what maintains the dollar's position as the world's
"reserve currency." These things indicate that the Fed plays a vital
role in the policy decisions which are reshaping American life. We assume that
the Fed's members are equally supportive of the repressive police-state measures
which have been put in place in anticipation of problems that will undoubtedly
arise from the economic meltdown they have painstakingly engineered.
The rate cuts tell us that the Fed is now planning to
balance the current account deficit on the backs of the American middle class.
Prices at the supermarket and gas pump will rise immediately; probably within
the next few months if not weeks. It will be harder to get credit. Wages and
living standards will decline. Stocks will fall. Consumer spending will shrivel.
Surprisingly, Bernanke's rate cuts don't even address the
underlying problems they are supposed to cure. Millions of homeowners who took
out subprime and Alt-a loans are headed for foreclosure. Only a small
percentage of these will benefit from the rate cuts and avoid default because
of lower "resets" on their loans. Most of them will not qualify for
refinancing UNDER ANY TERMS because they don't meet the new standards for
securing a loan. Banks and mortgage companies have become much stricter in
their lending practices.
The rate cuts don't really help the banks or hedge funds,
either. Their stocks may lurch upward for a day or two, but that won't last.
Money is getting tighter and spending is down. It's not a good time to be
holding hundreds of billions in mortgage-backed liabilities (CDOs) which may
have been leveraged many times their original-value. There's no market for
these CDOs. They're turkeys. The debt will either have to be written off or the
companies will be forced into bankruptcy.
Rate cuts won't stem the tide of insolvencies or fix the
deeply-ingrained problems in the financial markets. All they will do is
forestall the impending recession by sustaining abnormal levels of liquidity.
But as consumer spending contracts and unemployment continues to rise; the
Fed's "Band-Aid" approach to these systemic problems will prove to be
ineffective. Bernanke is sacrificing the one thing he'll need most in the bumpy
months ahead: his credibility.
As economist and author Henry Liu says, "A market that
catches on to the impotence of central-bank intervention can go into free
The most compelling argument for interest rate cuts was made
by economist Martin Feldstein in a Wall Street Journal article, "Liquidly
Now". Feldstein summarized the issue like this: "Three separate but related forces are now threatening economic
activity: a credit market crisis, a decline in house prices and home building,
and a reduction in consumer spending. These developments compounded the general
weakening of the economy earlier in the year, marked by slowing employment
growth and declining real spendable income.
"The subprime mortgage defaults have triggered a
widespread flight from risky assets, with a substantial widening of all credit
spreads, and a general freezing of credit markets. Official credit ratings came
under suspicion. Investors and lenders became concerned that they did not know
how to value complex risky assets.
"In some recent weeks credit became unavailable. Loans
to support private equity deals could not be syndicated, forcing the banks to
hold those loans on their own books. Banks are also being forced to honor
credit guarantees to previously off-balance-sheet conduits and other back-up
credit lines, further reducing the banks' capital available to support credit
of all types.
"The inability of credit markets to function properly
will weaken the overall economy in the coming months. And even when the credit
market crisis has passed, the wider credit spreads and increased risk aversion
will be a damper on economic activity.
"In addition to these general credit market problems,
the decline of house prices and home building will be a growing drag on the
economy. Falling house prices would not only cause further declines in home
building but would also shrink household wealth and thus consumer
Feldstein has a good understanding of the problem, but
backpedals on the solution. He says: "Fed action to lower interest rates
cannot solve the credit market problems, but it would help the economy: by
stimulating the demand for housing, autos and other consumer durables; by
encouraging a more competitive dollar to stimulate increased net exports; by
raising share prices to increase both business investment and consumer
spending; and by freeing up spendable cash for homeowners with adjustable-rate
Feldstein paradoxically wants rate cuts even though he
admits that "lower interest rates cannot solve the credit market
problems" but will just stimulate more wasteful "consumer
That's not a cure. That's just more Greenspan snake oil.
"Too much liquidity" is the problem not the
solution. The reason the markets are so volatile and likely to implode at any
minute is because every asset-class has been foolishly inflated by a monetary
policy that followed Feldstein's prescription. Now he wants to avoid the
consequences of these misguided policies by reflating the bubble and destroying
the dollar in the process. It's a bad idea.
The Fed's cuts coincide with the dismal earnings reports
from Wall Street's investment giants, Lehman Brothers, Morgan Stanley, Bear
Stearns and Goldman Sachs. The four investment firms have taken a combined 22
percent haircut in the last quarter and are expected to sustain heavy losses
from the billions of dollars of subprime CDOs they'll have to either downgrade
or write off. So far, Bernanke's rate cuts have diverted attention from the
grim news and falling profits from America's investment core.
The big financials aren't the only one's feeling the pinch
from the housing meltdown either. There are many others including Bank of
America that announced "unprecedented dislocations" in credit markets
will have a "meaningful impact" on third-quarter results at its
corporate investment bank. "Chief Financial Officer Joe Price told
investors at a conference in San Francisco, 'These are quite challenging
financial times, and I cannot remember when credit markets in particular have
been as volatile and unpredictable as they have been for the last few
months.'" (Bloomberg News)
Bernanke's rate cuts are "thin gruel" for the
banks' bottom lines, but they do offer a welcome distraction from the
relentless drumbeat of bad economic news. The subprime sarcoma has spread to
every part of the financial markets. It's not just the steady up tick of
foreclosures and mushrooming real estate inventory. The banks are also hoarding
capital to cover their losses on unmarketable CDOs and leveraged buyouts
(LBOs), which means that new mortgages will slow to a crawl even to
An article in Bloomberg News gives us some idea of how
quickly the market for housing-related bonds has deteriorated: "Sales of
US asset-backed securities, such as bonds that repackage subprime loans or
credit card debts as well as collateralized debt obligations, fell 73 percent
from a year earlier to $30 billion last month, according to estimates from
analysts at Deutsche Bank AG."
Bernanke is just
prolonging the pain by not allowing the market to complete its cycle so that
bad debts can be written off and industry can retool for the future. He's
buying time for his banker friends, but doing considerable damage to the dollar
in the process.
Jim Rogers, the
chairman of Beeland Interests Inc. summed up the rate cuts like this:
"Every time the Fed turns around to save its friends on Wall Street, it
makes the situation worse. The dollar's going to collapse, the bond market's
going to collapse. There's going to be a lot of problems in the U.S.''
Rogers is not alone in his conclusions.
Even foreign leaders, like Venezuelan President Hugo Chavez,
have commented recently on the worrisome state of US markets. Three days ago
Chavez said on public television that we may be facing a "global financial
earthquake" as the result of "irresponsible" US economic
policies. Chavez quoted Nobel Laureate Joseph Stiglitz's warning that we may be
facing a major economic disaster which could lead to "widespread misery,
hunger and severe unrest. And the United State is to blame."
Chavez added that the Bush administration "has had to
inject $300 US billion into the private banks this month to avoid a collapse of
the dollar and the world economy .The dollar is going down, they don't see that
it isn't supported by reality" and it is "because its fiscal deficit
is the largest in history."
Chavez's predictions appear to be accurate as we can see
that gold has suddenly skyrocketed while the dollar continues to fall.
The firestorm that began with the Fed's low interest rates
in 2002-2003 and evolved into the subprime-lending crisis of 2006-2007 is now
threatening the stability of the entire financial system and the broader global
economy. The reason for this is that mortgage debt is the foundation upon which
all manner of bizarre-sounding debt instruments are now resting. These
debt-instruments (derivatives) greatly magnify the leverage on the underlying
asset which often is nothing more than a shaky subprime loan.
According to Satyajit Das, a respected authority on
derivatives trading, "A single dollar of 'real' capital supports $20 to
$30 of loans. This spiral of borrowing on an increasingly thin base of real
assets, writ large and in nearly infinite variety, ultimately created a world
in which derivatives outstanding earlier this year stood at $485 trillion -- or
eight times total global gross domestic product of $60 trillion." (Are We
Headed for an Epic Bear Market" Jon Markman)
We are now seeing the first signs that this enormous
debt-bubble is beginning to implode. There's very little the Fed can do to
affect the inevitable crash that (we believe) they engineered. As defaults in
housing continue to rise, the swaps and derivatives in the secondary market
will implode. Trillions in market capitalization will vanish in a flash.
US GDP for the last six years has largely depended on
transactions involving the exchange of massively over-levered assets.
Production in the real economy has remained flat. The investment banks are at
the epicenter of this controversial new system called "structured
finance." We continue to believe that the banks that depended on
mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs)
(as well as asset-backed commercial paper) for the bulk of their income; are in
deep trouble. Robert E. Lucas alluded to potential bank woes in an article in
the Wall Street Journal, "Mortgages and Monetary Policy": "There is an immediate risk of a
payments crisis, a modern analogue to an old-fashioned bank run. Many
institutions -- not just banks -- have payment obligations that are far in
excess of the reserves to which they have immediate access. Against these
obligations they hold short-term securities that they believed could be
liquidated on short notice at little cost. If some of these securities turn out
not to be liquid in this sense (and especially if no one is sure who holds
them) then everyone wants to get into Treasury bonds."
Its rare when we are in agreement with the far-right
viewpoints of the WSJ's editorial page, but in this case, Lucas nailed it. The
banks have "obligations that are far in excess of the reserves to which
they have immediate access." This is a direct result of the new market
architecture of "structured finance" which stacks debt on debt until
the whole system is pushed to the breaking point.
Low interest rates can't fix this "systemic"
problem. Only fiscal policy can soften the blow of a deflating credit bubble.
Economist Henry Liu offers this constructive "New Deal-type" proposal
which is a sensible (and ethical) way to address the prospect of growing
unemployment and increasing economic hardship for the middle and lower classes:
"A case can be made that what is needed under current conditions is not
more cheap money from the Fed, but full employment with rising wages by
government fiscal stimulants to boost consumer demand. The US government should
make use of the money that the banks cannot find worthy borrowers to lend to,
with money-cautious investors seeking to lend to the government, creating jobs
for infrastructure rehabilitation and upgrading education to get the economy
moving again off the destructive track of privatized systemic financial
manipulation." ("Either Way, It could be an Unkind Cut" Henry C
K Liu, Asia Times)
Liu is right. We should be enacting the policies which
reflect our values on social justice and the equitable distribution of wealth.
Instead, the system is being manipulated by an oligarchy of racketeers who have
savaged the currency, drained our treasury, and paved the way for a painful
cycle of deflation. The US consumer is now being blamed for the massive current
account deficit, as if shopping at Wal-Mart for the lowest prices was a crime.
But the Fed is the real culprit. They have been opposed to protective tariffs or
currency regulation from the very beginning. No country in the history of the
world has ever allowed its industrial base to be so ruthlessly decimated
(offshoring, outsourcing, factory closures) just to feed the insatiable avarice
of its criminal elites.
The current account deficit is the logical upshot of
"free trade." And, free trade is the Orwellian moniker used to
describe the millions of decent paying jobs which are sacrificed on the altar
of globalization. The workers had no part in creating this destructive
Nor did they have any say-so in the design of the modern
market, which is often referred to as "structured finance."
Structured finance has been promoted as a way of using capital more efficiency
by distributing risk more evenly throughout the system. In fact, it has turned
out to be a colossal swindle which is now threatening to break the banks and
bring the stock market crashing down. It is essentially a mortgage-laundering
scheme concocted by the investment banks, winked-at by the so-called
regulators, facilitated by the ratings agencies, and exploited by the hedge
funds. The victims of this scam are the insurance companies, foreign investors,
pension funds and overleveraged homeowners. Their losses are liable to soar
into the trillions of dollars.
Fed chief Alan Greenspan enthusiastically endorsed every
dodgy "structured finance" idea; including subprime lending, ARMs,
Mortgage-backed securities, currency deregulation, credit expansion and
structural changes to the financial services industry. These are the pavers on
the road to perdition carefully put in place by the Federal Reserve.
Historian Gabriel Kolko summed up "structured
finance" in a recent article, "The Predicted
Financial Storm Has Arrived": "We are at an end of an era . . . Now
begins global financial instability. It is impossible to speculate how long
today's turmoil will last -- but there now exists an uncertainty and lack of confidence
that has been unparalleled since the 1930s -- and this ignorance and fear is
itself a crucial factor. The moment of reckoning for bankers and bosses has
arrived. What is very clear is that losses are massive and the entire developed
world is now experiencing the worst economic crisis since 1945, one in which
troubles in one nation compound those in others . . .
"Internationalization of finance has meant less
regulation than ever, and regulation was scarcely very effective even at the
national level . . .
"Greed's only bounds are what makes money. Existing
international institutions -- of which the IMF is the most important -- or
well-intentioned advice will not change this reality."
The people must take
over control of their own currency again. The Federal Reserve must be
Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.