The Debt

The Biggest Bank Robbery In History? More Quantitative Easing = Backdoor Bailouts For The Big Banks Without Having To Go Through Congress

The U.S. Federal Reserve is getting ready to conduct another gigantic bailout of the big banks, but this time virtually nobody in the mainstream media will use the term “bailout” and the American people are going to get a lot less upset about it.  You see, one lesson that was learned during the last round of bank bailouts was that the American people really, really do not like it when the U.S. Congress votes to give money to the big banks.  So this time, the financial “powers that be” have figured out a way around that.  Instead of going through the massive headache of dealing with the U.S. Congress, the Federal Reserve is simply going to print money and give it directly to the banks.  To be more precise, the Federal Reserve is going to use a procedure known as “quantitative easing” to print money out of thin air in order to purchase large quantities of “troubled assets” (such as mortgage-backed securities) from the biggest U.S. banks at well above market price.  Some are already openly wondering if this next round of quantitative easing is going to be the biggest bank robbery in history.  Most Americans won’t understand these “backdoor bailouts” well enough to get upset about them, but that doesn’t mean that they won’t be just as bad (or even worse) than the last round of bailouts.  In the end, all of the inflation that this new round of quantitative easing is going to cause is going to be a “hidden tax” on all of us.

These new backdoor bailouts are going to work something like this….

1) The big U.S. banks have massive quantities of junk mortgage-backed securities that are worth little to nothing that they desperately want to get rid of.

2) They convince the Federal Reserve (which the big banks are part-owners of) to buy up these “toxic assets” at way above market price.

3) The Federal Reserve creates massive amounts of money out of thin air to buy up all of these troubled assets.  The public is told that all of this “quantitative easing” is necessary to stimulate the U.S. economy.

4) The big banks are re-capitalized and have gotten massive amounts of bad mortgage securities off their hands, the Federal Reserve has found a way to pump hundreds of billions (if not trillions) of dollars into the economy, and most of the American people are none the wiser.

During a recent appearance on MSNBC, Matt Taibbi of Rolling Stone did a great job of explaining how this all works….

http://www.youtube.com/watch?v=uwhMVB0XzPU&feature=player_embedded

But this isn’t the only way that the Federal Reserve forks over massive amounts of cash to the big U.S. banks.  In a previous article, I described how the U.S. Federal Reserve lends huge quantities of nearly interest-free money to big U.S. banks which they turn around and invest in U.S. Treasuries which bring in a return of three percent or so.  In essence, it is a legalized way for the big U.S. banks to make mountains and mountains of free money.

The truth is that the Federal Reserve does whatever it can to ensure that the big U.S. banks stay fat and happy. 

So what about the small banks?  What happens to them?

Well, the vast majority of the small banks are considered “not big enough for bailouts” and they are allowed to die like dogs.

Don’t let anyone ever fool you into thinking that the U.S. banking system has a level playing field.

For weeks, Federal Reserve officials have been coming out and have been dropping hints about how important it is for them to take “action” and implement another round of quantitative easing in order to help stimulate the U.S. economy.

In fact, during his speech on Friday, you could almost hear Ben Bernanke salivating at the thought of printing more money.

But nobody ever really asks who is going to be the first to get their hands on all this money that the Fed is going to pump into the economy.

The answer, of course, is obvious.

It is going to be the big banks – the same banks that are part-owners of the Federal Reserve and that have tremendous influence over Fed policies.

But even though this is all more than a little shady, is it such a bad thing for the rest of us if the Federal Reserve bails out the big banks and brings some much needed stability back to the U.S. financial system?

After all, if “Foreclosure-Gate” could potentially cause a nightmarish financial meltdown, isn’t it better for the Federal Reserve to step in and soak up large amounts of these toxic assets?

Those are legitimate questions.

Certainly the Federal Reserve has the power to step in and smooth over all sorts of short-term problems by papering them with money, but in the end printing more money will just make our long-term problems even worse.

Whenever a new dollar is introduced into the system, every other dollar in existence loses a little bit of value.

When trillions of new dollars get introduced into the system, it has the potential to create an inflationary nightmare. 

Already, a number of top Fed officials are publicly saying that inflation is “too low” and that we need to purposely generate more inflation in order to “stimulate” the U.S. economy.

Yes, that is just as insane as it sounds, but that is what they are actually proposing.

Apparently many top Federal Reserve officials honestly believe that they can pump trillions into the economy, jack up inflation significantly, and little harm will be done.

But even before “QE2” has begun, we are already starting to see all kinds of little bubbles beginning to develop in the financial system.  For example, commodity prices are skyrocketing right now, and that will soon be affecting the price we pay for food at the supermarket.

We are already on the road to serious inflation and the Federal Reserve has not even fired up the money hoses yet.  So what is going to happen after they pump trillions more into the economy?

Printing more money and giving it to the banks is not going to solve our economic problems.  It is just going to make them worse.

But unfortunately, American voters get no say about any of this.  Our national monetary policy is in the hands of an unelected central bank that does pretty much whatever it wants.   

An economic nightmare is coming, and you had better get ready.

The Number One U.S. Export To China: Waste Paper And Scrap Metal

Historians tell us that by the very end of the Roman Empire, goods were pouring into Rome from all over the known world, but about the only thing being sent out of Rome was human waste and garbage.  America has not yet reached that point, but we are certainly well on our way.  In 2010, the number one U.S. export to China is “scrap and trash”.  Yes, you read the correctly.  The number one thing that China buys from us is our garbage.  According to author Clyde Prestowitz, China’s number one export to the U.S. is computer equipment (nearly $50 billion) while our number one export to them is waste paper and scrap metal (approximately $8 billion).  When it comes to world trade, China is literally wiping the floor with the United States.  In August, the U.S. trade deficit with China set a new one month record of $28 billion dollars.  Our insane trade policies are making China (along with several of our other “trade partners”) incredibly wealthy, and the U.S. government ends up begging China to lend that money back to us to fund the exploding U.S. national debt.  That just isn’t stupidity – that is insanity.

The truth is that our “twin deficits” are literally bankrupting this nation.  We are completely and totally destroying the economic future of our children and grandchildren.

But hey, the Vikings beat the Cowboys, Dancing With The Stars is heating up and we all have a bunch of DVDs to get caught up on so why worry ourselves, right?

Unfortunately, the reality is that we can’t afford to be “comfortably numb” any longer if we hope to have any kind of a future.

It is time to wake up people.

Sadly, a significant percentage of young Americans these days can’t even tell you what a “trade deficit” is. 

If you don’t believe this, just try a little experiment some time.  Just go up to a few young Americans on the street and ask them to define “trade deficit” for you.

But fortunately, the vast majority of the readers of this column are quite informed.  Unfortunately, I still don’t believe that most of you really understand how incredibly dangerous the trade deficit is.

So just how dangerous is the trade deficit?  Well, world famous investor Warren Buffett once put it this way….

“The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.”

Between 2000 and 2009, America’s trade deficit with China skyrocketed nearly 300 percent.  Wealth, factories and jobs are leaving the United States at an astounding pace.  The danger that this represents to our economy is so vast that it is hard to even describe.

If you ever find yourself in a debate with proponents of “free trade”, you can almost always get them to eventually admit that “free trade” will raise the standard of living for workers in countries like China while significantly lowering the standard of living for U.S. workers, but that this must be done for the good of the emerging “global economy”.

Of course U.S politicians never really mention this nasty little fact when they give speeches about how wonderful our trade policies are.  They never really get around to mentioning that “free trade” is one of the key foundations of “globalism” and that we are being merged into a one world economy.

Today, American workers do not just compete with other American workers.  Instead, U.S. workers now find themselves in direct competition for jobs with workers in China that makes less than a tenth of what an American worker would make.  In China, a garment worker makes approximately 86 cents an hour.  Apple iPhones are manufactured in China by workers making about 293 dollars a month (and that was after a big raise).

So exactly how long do you think you and your family would be able to survive on 293 dollars a month?

But unfortunately, millions more Americans will lose their jobs and millions more Americans will be forced to take a cut in pay in order to compete in the new global economy.

According to a disturbing new study by the Economic Policy Institute, if the trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.

The sad truth is that it is NOT a good time to be a blue collar worker in America.  If your job does not get offshored or outsourced, then it is likely to be made obsolete by computers and automation. 

The need for manual labor is rapidly declining in today’s world.  For example, there is a Japanese firm called Fanuc, Ltd. that actually has industrial robots manufacturing other industrial robots in a “lights out” factory.

How bizarre is that?

But things wouldn’t be quite as bad for U.S. workers if China was not cheating so badly.  The truth is that they just do not play the game fairly.

For instance, it is estimated that the Chinese government is keeping China’s currency valued about 40 percent lower than it should be.  This is essentially a de facto subsidy to China’s exporters.

There has been a little bit of rumbling in the Obama administration about this in recent weeks, but it is quite unlikely that they will push China too far on this issue.  After all, the Obama administration desperately needs China to keep loaning us massive quantities of money so that we can keep funding our runaway debt.

If you sit back and objectively analyze the facts, it quickly becomes undeniable that China is beating the living crap out of us economically.  In fact, one prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040 if current trends continue.

This all could have been turned around a decade or two ago, but now China has us by the throat.  At any time, China could decide to start selling off massive quantities of U.S. Treasuries.  At any time, China could decide to cut off our supply of rare earth elements (of which they have a virtual monopoly).   

China is now even the number one supplier of components that are critical to the operation of U.S. defense systems.  How smart were we to allow that to happen?

It is a direct threat to national security for China to have so much leverage over us.  But you rarely hear anyone talking about this.

The truth is that trade with China is not a left/right issue.  As I have written about previously, it is impossible for any self-respecting conservative to justify our trade policies with China and it is impossible for any self-respecting liberal to justify our trade policies with China.

Yet very few current members of the U.S. Congress ever discuss the possibility of sweeping changes to our trade policies.

So we will continue to lose thousands of factories, we will continue to lose millions of jobs and we will continue to see the biggest transfer of wealth in the history of the world accelerate.

So do any of you think that I am wrong about this?  Please feel free to leave a comment with your opinion below….

The Bernanke Speech

When Federal Reserve Chairman Ben Bernanke gives a speech about the U.S. economy, it gets a whole lot more attention than when Barack Obama gives a speech about the U.S. economy.  Why is this true?  Well, it is because Bernanke has a whole lot more control over the U.S. economy than Obama does. It is the Federal Reserve that controls monetary policy and interest rates. It is the Federal Reserve that can create money out of thin air. It is the Federal Reserve which is going to have the most influence over whether there will be inflation or deflation. So when Bernanke gives a speech, world financial markets listen. On Friday, news of the Bernanke speech sent gold and silver soaring towards new highs and send the U.S. dollar tumbling once again.  This new Bernanke speech was yet another very strong indication that Helicopter Ben is getting ready to fire up the printing presses in an attempt to get the U.S. economy moving.   

So is it a good thing for an unelected, virtually unaccountable private central bank called the Federal Reserve to have more power over the U.S. economy than the president of the United States?

Of course not.

But that is the way our system works.

So what did Bernanke say during his speech in Boston that was so earth shattering?

Well, you can read a full transcript of what Bernanke said right here.  The following are a few key excerpts from Bernanke’s remarks….

*”Although output growth should be somewhat stronger in 2011 than it has been recently, growth next year seems unlikely to be much above its longer-term trend. If so, then net job creation may not exceed by much the increase in the size of the labor force, implying that the unemployment rate will decline only slowly. That prospect is of central concern to economic policymakers, because high rates of unemployment–especially longer-term unemployment–impose a very heavy burden on the unemployed and their families. More broadly, prolonged high unemployment would pose a risk to consumer spending and hence to the sustainability of the recovery.”

Clearly, Bernanke feels as though unemployment is way, way too high and that lowering unemployment is now the number one policy priority of the Federal Reserve.

So how will this be accomplished?  After all, interest rates are already kissing the floor and that hasn’t brought the U.S. economy back to life.

Well, as most financial analysts are anticipating, the Fed could launch a substantial new round of quantitative easing.

But wouldn’t that cause a rise in the inflation rate?

Well according to Bernanke’s speech, the U.S. economy is supposed to have a certain amount of inflation….

*”Similarly, the mandate-consistent inflation rate–the inflation rate that best promotes our dual objectives in the long run–is not necessarily zero; indeed, Committee participants have generally judged that a modestly positive inflation rate over the longer run is most consistent with the dual mandate.”

Do you understand what Bernanke is saying there? 

He is actually saying that the goal of the Federal Reserve is not to have a zero inflation rate.  Rather, he says that we should expect to always have at least some inflation and that this is normal.

In fact, in his speech Bernanke said that inflation in the United States is currently too low….

*”…inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve’s dual mandate in the longer run.”

Inflation is too low?

Is he joking?

No, sadly he is not.

Instead, he seems ready to break out the money hoses and start showering dollars from every street corner….

*”Given the Committee’s objectives, there would appear–all else being equal–to be a case for further action.”

“Further action” being code words for the “quantitative easing” that we have all been anticipating.

The funny thing is that in the nearly 4,000 word Bernanke speech there was not a single word about the value of the U.S. dollar.

This month the U.S. dollar has been plummeting like a rock, but apparently it is not an important consideration for Bernanke.

In essence, Bernanke’s message is that the focus is on trying to “fix” the U.S. economy and if it is necessary to jack up the rate of inflation and to radically devalue the U.S. dollar then that is what we are going to do.

Bernanke also did not mention the foreclosure fraud crisis which threatens to throw the entire U.S. mortgage industry into a state of absolute turmoil.

But the rest of the financial world is definitely starting to take notice of this crisis.

All of this uncertainty is already starting to take a huge toll on U.S. bank stocks.  Several of the largest U.S. banks have seen their stock prices significantly decline in recent days.

The truth is that this could be the biggest challenge for big U.S. banks since the 2007 financial collapse.  Just consider the following very troubling signs….

*JPMorgan announced on Wednesday that it has boosted its reserves by a billion dollars in order to cover faulty mortgages that it was obligated to repurchase from Fannie Mae, Freddie Mac and private insurers.  In all, JPMorgan has set aside approximately 3 billion dollars for potential mortgage repurchases.

*But a few billion dollars may not be nearly enough for many of these big banks.  According to an estimate by Branch Hill Capital, Bank of America could be forced to repurchase up to $74 billion in mortgages.

*The losses from this crisis could be absolutely staggering.  Analyst Dick Bove is projecting that U.S. banks could lose a combined 80 billion dollars as a result of this foreclosure fraud crisis.

The truth is that it would be hard to understate just how much of a financial mess this foreclosure fraud crisis could possibly become.  A recent article by Nomi Prins did a great job of discussing some of the potential implications of this crisis….

If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, you can imagine how difficult selling assets stuffed with faulty loans might be. If it’s tough to find a title for a foreclosed home, think how tough it is to back the related loan out of a pyramid of securities sitting on top of it.

See, the loan that might be analyzed in a foreclosure situation could be part of a chain connecting the underlying home to 20 or 50 different securitized assets, all depending on it for either the interest payments the loan was supposed to provide, or the value of the foreclosure property if those payments stopped (in Wall Street speak, the “recovery value”). If a foreclosed property isn’t selling, it’s not recovering any money back to any asset waiting for it. Think what that can do to the value of toxic assets living at the Fed and the Treasury Department.

This foreclosure fraud crisis is extremely complicated, but the reality is that this could be the thing that breaks the back of the U.S. financial system.  For much more on the specifics of this crisis, please check out the following articles that I have previously posted….

#1 Foreclosure-Gate

#2 Foreclosure Fraud: 6 Things You Need To Know About The Crisis That Could Potentially Rip The U.S. Economy To Shreds

#3 The Real Horror Story: The U.S. Economic Meltdown

The truth is that the U.S. economy is headed for extreme danger and what Bernanke wants to do is douse it with gasoline and light it on fire.

Once the Federal Reserve starts down the road of trying to “stimulate inflation” in order to get the U.S. economy going, it is going to be really hard to turn back around again.

But the truth is that this is what the U.S. Federal Reserve has always done.  They have always destroyed the value of the U.S. dollar.  The U.S. dollar has lost over 95 percent of its value since the Federal Reserve was created in 1913, and now Bernanke says that we need to actually accelerate the pace of the destruction of the dollar in order to “help” the economy.

In the end, this whole thing is going to fall apart.  In the end, all of the juggling and fancy financial moves by the Fed are going to fail. 

The U.S. financial system is a pyramid of fraud built on a mountain of debt.  By definition it is unsustainable.  At some point it is going to dramatically collapse.  The only real question left to answer is when it will happen.

+ More